Bellring Brands, Inc. (BRBR) Q1 2022 Earnings Call Transcript

Welcome to BellRing Brands' First Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today from BellRing Brands are Darcy Davenport, President and Chief Executive Officer; and Paul Rode, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 1:30 p.m. Eastern Time. The dial-in number is (800) 839-8318. No pass code is required. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of BellRing Brands, for introductions. You may begin.

Good morning, and thank you for joining us today for BellRing Brands' first quarter fiscal '22 earnings call. With me today are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks, and afterwards, we'll have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the Investor Relations and the SEC filings sections at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. Additional information regarding these risks and uncertainties is discussed under the Forward-Looking Statements section in the press release we issued yesterday and other press releases we have issued with respect to Post's proposed distribution of its interest in BellRing Brands, which are posted on our website. We also urge you to read both the registration statements, the proxy statements, and prospectuses, the related amendments of these filings and other documents related to the proposed distribution of Post interest in BellRing Brands that have been and will be filed with the SEC when they become available, because they will contain important information. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy.

Thanks, Jennifer, and thank you all for joining us. Last evening, we reported our first quarter results and posted a supplemental presentation to our website. This presentation is designed to provide more insight into our business, consumption patterns, and key metrics, and now include both Premier Protein and Dymatize. Our first quarter came in slightly ahead of expectations, with sales of $307 million, and adjusted EBITDA of $60 million. Net sales grew 9% over prior year, led by Dymatize, which was up 41%; Premier Protein grew 5%, both brands benefiting from pricing actions. This single-digit growth for Premier Protein was expected as we lap prior year promotions that aren’t repeating. Our adjusted EBITDA margins were healthy despite significant cost headwinds. As you saw in yesterday's press release, we reaffirmed our fiscal '22 guidance for both net sales and adjusted EBITDA to grow between 9% and 13%. Other than a slight shift in Dymatize sales from second quarter into first, we don't expect major deviations to the cadence we communicated last quarter. Not surprisingly, inflation ramped up across freight and dairy proteins this quarter. As a result, we announced further price increases on shakes and powders, which will mainly benefit the second half of the year. We expect Q2 sales to be similar to Q1, and to sequentially grow, reflecting the incremental pricing actions and new capacity. We will experience margin pressure in Q2 until the price increases are implemented. Overall, we believe the balance of the year leans toward upside; however, we have seen how quickly circumstances can change in this environment. While our confidence in the year has grown, at this point, we are reaffirming our guidance. The key drivers that would add opportunity or risk to the year are our ability to deliver our expected production, elasticity related to upcoming pricing actions, and additional inflation. Now turning to our category brand highlights and updates on capacity expansion. We continue to see robust growth in the convenient nutrition category. Ready-to-drink beverages and ready-to-mix powders both grew 17% versus year ago. Strong consumer tailwinds around wellness and healthier food solutions are driving this growth. RTD beverages added 2.3 points to household penetration, and saw growth in purchase size and volume. Ready-to-mix powders continue to be fueled by an increased interest in proactive health and fitness. Our brands are growing despite supply chain challenges. Premier Protein shake consumption grew 10% across tracked and untracked channels, with ecommerce and mass leading the way. Brand metrics remained strong, demonstrating our high consumer loyalty. Household penetration and repeat rates are holding steady, and velocities are at 45% versus year-over-year. Our TDPs have started to rebound as we have increased trade inventory levels this quarter. Despite these encouraging signs, we expect Premier Protein RTD shake consumption in Q2 to lag prior year because we're lapping significant promotional periods. Moving to Dymatize, Dymatize had a fantastic quarter, with consumption in the U.S. up 48% across tracked and untracked channels. All key channels contributed with double-digit growth, and brand velocities remained strong. Dymatize ISO100 launched two exciting new flavors this quarter: Dunkin' Cappuccino and Mocha Latte, both flavors which were co-developed with Dunkin' are off to a great start. Our operating environment remains challenging. Supply chain disruptions, largely around labor availability at our existing co-manufacturers, are impacting our ability to rebuild inventory as fast as we want. First quarter production came in slightly below our expectations mainly due to COVID-driven labor shortages. However, we are encouraged by the improvement in January. Our capacity expansions are progressing well and remain on track. As you may remember, we have capacity coming online each quarter starting Q2. We are comfortable with our ramp-up assumptions despite COVID-related challenges. We also made significant progress identifying and vetting additional growth partners who are expected to bring on capacity in fiscal '23 and '24. Finally, I would like to share a brief update on Post distribution of its interest in BellRing. Overall, the transaction remains on track. We have scheduled a special meeting of BellRing stockholders on March 8th to vote on the transaction. Post will announce additional details about the spin-off in the coming weeks. We believe that upon completion of the transaction, BellRing will have increased strategic flexibility to manage our capital structure and should benefit from more liquidity in our shares. In closing, we all have been tested over the last two years. I have been impressed by how our employees, manufacturing, logistics partners, and customers have navigated this period. I believe we will look back on '22 as a pivotal year for our brands and our company; one where we solidified the foundation of the business so we can really see what our brands are capable of in the future. I continue to believe that we are in the early innings of our category and brand's growth. Premier Protein and Dymatize are perfectly positioned to attract households into the category and improve consumers' health along the way. Thank you, and I look forward to updating you on our progress throughout the year. I will now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. Net sales for the quarter were $306.5 million, up 8.5%. Adjusted EBITDA was $59.8 million, a slight decline from the prior year, and EBITDA margin was 19.5%. Premier Protein net sales grew 4.5% driven by higher average net selling prices reflecting reduced promotional activity and price increases. Recall that while we face capacity constraints, we have temporarily reduced tetra shake SKUs and promotional marketing. This resulted in expected volume declines for Premier Protein in the quarter. Despite this decline, shipments exceeded consumption in the quarter and resulted in increased retail inventory. Dymatize net sales grew 41% with volumes up 8%. Net sales outpaced volume growth benefiting from higher average net selling prices which reflected price increases and a favorable mix. Strong velocities and distribution gains drove volume growth. Gross profit of $92 million was flat to last year with a decrease in gross profit margin to 30.1%. The gross margin decline results from higher dairy protein costs as well as increased freight which was mitigated by higher net selling prices. SG&A expenses of $37 million included $2 million of separation costs. Prior year SG&A expenses included $4.6 million in restructuring and facility closure costs. Both items were treated as adjustments for non-GAAP measures. Excluding these items, SG&A increased $1 million and was favorable by 50 basis points as a percentage of sales. Our cash flow in the first quarter was unfavorably impacted by higher working capital, a decrease in payables, and an increase in powder inventories contributing to these results. We expect further working capital increases throughout the year as we rebuild our RTD shake inventory levels. During the quarter, we had an attractive entry point and repurchased 800,000 shares of class A common stock at an average price of $23.34 per share. Our remaining share repurchase authorization is $42 million. As of December 31, net debt was $489 million and net leverage was 2.1x. During the first quarter, we repaid debt of $90 million using cash on hand. Turning to our outlook, we are maintaining our guidance for net sales of $1.36 to $1.41 billion and adjusted EBITDA of $255 to $265 million. As Darcy highlighted, the year is progressing slightly ahead of expectations with net sales and adjusted EBITDA growth weighted to the second half. Inflation has outpaced our initial estimates, so we expect additional cost headwinds for both shakes and powders. However, we are executing a price increase to help offset these impacts which will benefit gross margins in the second half. During the second quarter, we expect high single-digit net sales growth as higher net pricing and volume growth for our powder portfolio are partially offset by volume declines in RTD shakes as we lack promotional activity. We expect adjusted EBITDA to grow significantly from prior year benefiting from the pullback of promotions and marketing. Second quarter adjusted EBITDA is expected to decline sequentially driven by inflation ahead of pricing as well as modestly higher SG&A. Finally, as Darcy mentioned, Post's distribution of its interest in BellRing remains on track. We expect approximately $400 million of cash will be distributed to BellRing's stockholders, including Post. As a result, we expect net debt of BellRing will increase to an amount not to exceed four times adjusted EBITDA. More details will be provided over the coming weeks. In closing, we are encouraged by the solid start to the fiscal year. While we and our industry are facing short-term challenges and historical inflation, our optimism and outlook for our business has never been brighter.

Good morning, everybody.

Good morning.

Morning.

Thank you for the question. To start, Darcy has mentioned that 2021 felt like a year where BellRing experienced almost two years' worth of growth condensed into a single year. This was largely due to increased capacity and significant gains in shelf space with key customers. I'm interested to know how this situation will evolve in the current year. Are there significant shelf reset opportunities where you see potential for further growth? Additionally, how does the capacity situation affect your ability to capitalize on these opportunities? I assume others are facing similar challenges. I have a follow-up question as well.

Sure. So, that right now, as you know, we reduced our SKUs, our tetra SKUs this year because of our capacity constraints. We have been able to hold, for the most part, about 90% of our space. Basically, customers are spreading out our facing on our core items because they're one of the most productive SKUs on the shelf. So, we're not in a place right now that, for the next year, we're going to be expanding our shelf space on our tetra SKUs. What's, I think, encouraging is we do have some innovation coming on outside of the 30-gram line toward the end of the year. But for the most part, this year, as it's a catch-up year for the 30-gram shake line. And so, we're not going to be expanding shelf space considerably.

Got it. I think when you implemented some initial price increases at the beginning of this year, you assumed that competitors would not necessarily follow suit, which was a cautious approach. Are you making a similar assumption with the additional pricing you're implementing? How are you considering your elasticity assumptions for this upcoming pricing round when forecasting and modeling internally? Thank you.

We are. We're assuming that we included some modest elasticity in our assumptions, so staying on the conservative side. In our first round, we tended to be the first to move on pricing in the category, and then most competitors followed fairly soon afterwards. But we have an approach to when we take pricing, we assume elasticity. And then when we see what happens in the marketplace we adjust those assumptions.

Thank you.

Thanks.

Good morning.

Good morning.

Morning.

You mentioned that production in the first quarter was slightly below expectations. Can you talk about how much of your fiscal '22 top line outlook is dependent on additional capacity coming online over the next few quarters? And it seems like the balance has shifted more towards pricing now given the incremental pricing you've taken in the quarter. So, is that kind of the right way to think about the composition of your top line outlook for the year?

I will address the production question first. The production results in Q1 were below expectations, primarily due to our existing co-manufacturers. New capacity will become available starting in Q2. Regarding the breakdown between existing and new production, the majority of our output this year will come from our current co-manufacturers. It's encouraging to see improvements in January with these manufacturers. The challenges we faced were mainly due to the Omicron variant, resulting in some absences. Although we’re still experiencing some staff shortages, we’ve managed to maintain production levels, indicating that our orders are being prioritized. Additionally, when we look at our growth composition, it varies by brand. For Premier, growth has mostly come from pricing, which will continue with the additional price increases announced this quarter. In contrast, Dymatize's growth is a mix of both volume and pricing. Paul, do you have anything else to add?

So, obviously, with the price increase, that does obviously push a bit more towards pricing, but as Darcy talked about in her prepared remarks, the increases obviously give us confidence in the year, but we're waiting to see how things play out with less disease, and those kinds of things. But it gives us a lot of confidence.

Thanks. And given some of the supply challenges in tetra packs, have you explored other options for packaging? I know you also sell bottled RTDs. Can you more meaningfully shift your mix to that format?

So, we do have bottles. But bottles are constrained too, so it's really across the end, because of the dramatic demand increase that happened last year, both bottles and tetras are constrained. So, it's not as easy, and our tetra business is so large that the idea of just shifting to another package size isn't feasible. I think we are moving. We're making some kind of co-man shifts on our bottle business, which will dramatically increase our ability to satisfy the increasing demand for our bottles. So, again, it's not as easy as just shifting, but I am confident in our increase that we have planned from a tetra standpoint. It's later in the year and then into '23, and like I said, bottles are also increasing.

Hey folks, good morning. Thanks for stepping me in.

Good morning, Jason.

I've got a couple of questions. First, you all confused me on some of the comments and guidance, it was probably my fault as I'm distracted over here, I'm trying to juggle too many balls. But can you go back and I think you said sales similar Q1 to Q2 but sequentially growing, which seemed like they can coexist? And then there was also some comments on EBITDA which sounded upbeat, but then you commented sequentially lower on price cost likes, et cetera. Do you kind of come back revisit and clarify those to me, please?

Sure, I'll hit the net sales. And I'm going to let Paul hit EBITDA. Net sales you nailed, it's that Q2 similar to Q1 and then sequentially growing and then Paul do you want to talk about EBITDA?

Yes, so, our comments on EBITDA, the second quarter, we expect to be sequentially down from the first quarter, which is consistent with our initial expectation going into the year, and that is because there is incremental inflation on our proteins primarily. So, to step up from Q1 into Q2 ahead of our pricing, and then we do expect a modest increase in SG&A. So, the comment was that EBITDA will be sequentially down from Q1.

Yes, but it always kind of is with seasonality, but was there a year-in-year comment in there though that I missed too?

There was not year-over-year. Obviously, it's a different dynamic because last year in the second quarter, it is almost the second quarter we've promoted heavily in the second quarter typically, that is not the case this year. So, there's a benefit on pricing both from reducing the promotion spend, as well as the list price increases that we took on powders in October and back on shakes back in April. So, we have the benefit of pricing. But we also have significantly higher inflation in the second quarter versus last year in particular; whey protein was at its low point, which is our powder product in the second quarter of last year. And it's significantly higher this year. So, that's the dynamics going on with EBITDA.

Got it, okay.

It is lower because of marketing spend. So, that is the one piece I did miss to mention is that we're also, we typically spend pretty heavily in marketing in the second quarter, because we do TV advertising, and we're not planning to do that this year. So, that's another element of EBITDA increase from last year, but again sequentially down to Q1.

Understood, and bigger picture question for you, Darcy, I remember around the time of separation, you talked about your aspirations to have Premier reach, I think curtain from on those but perhaps reach a 10% sort of penetration level. The penetration growth I'm looking at for the brand has been phenomenal. I think it's actually accelerated during COVID. And you're now north of 8%, so are we approaching sort of an upward governing limit of where you think this can go or is there now more scope for penetration growth as perhaps you're envisioning just a few years ago?

Yes, I believe this brand continues to surprise us. Not only do I see more potential for growth in the category, but our penetration is increasing at a faster rate than I anticipated. Therefore, I believe we can reach a level similar to some mainstream brands like Clif and Kind in the nutrition bar market, which are around 10%, 11%, and 12%. I still view this as a benchmark for where we can aim for in the medium term.

Got it. Okay, thank you. I'll pass it on.

Thanks.

Hey, guys, good morning. Jim Salera on for Ben, I wanted to ask a little bit on the production side and inflation, how long of a lead time will there be to get fill rates and service levels back to normal, assuming the Omicron production kind of shakes out in the second quarter. So, it actually is normal at the end of the second quarter to fill rates get back to normal levels in the third quarter, fourth quarter, or is that still looking into the next year?

Yes, our fill rates and service levels will continue to increase. We are already seeing kind of month on month, small increases. And we'll continue to see that throughout the year, I think we'll be in a much. I mean this quarter, our trade inventory levels improved. And again we'll continue to see that by, I would say Q3 they're going to look a lot better, beginning of Q3, they're going to be looking a lot better.

Thank you. And in fact, I could ask one more, you guys have any visibility into freight costs in the back half of the year, whether it's you anticipated to be kind of where it's been at for the first half, or it's going to go up maybe a little bit later?

Yes, we do expect the freight will go up into the third quarter. And then based on the evidence we've seen, it kind of flattens out at that point. And so from a year-over-year perspective, we have more of a headwind in the first half than we have in the second half. So, that's our current thinking.

Got it, thanks, guys. I will pass it on.

Thank you.

Thanks. Good morning.

Good morning.

Good morning.

Hi, Darcy, I have a question about Premier Protein. What do you think elasticity looks like in that category as you raise prices? Given your strong customer loyalty and significant market share in the drinks sector, are people simply buying less? If there is elasticity, are they switching to lower-priced brands or other options? I'm trying to understand this better, as it seems there might not be much elasticity, particularly with your customer base. But I assume you've accounted for some elasticity when considering higher prices.

Today, we have seen no elasticity. We have been watching it and basically we increased price and volume went up. However, we are not assuming that's going to continue. So, we are assuming some modest elasticity until we see it in the marketplace and kind of the facts and circumstances that we see in the marketplace based on what competitors do, et cetera. How much the retailer reflects that shelf, then we will make any adjustments to our assumptions.

Thank you. Regarding costs, I'm trying to understand how much of this is temporary. Specifically, considering factors like labor and freight, when it comes from co-manufacturers, how much do you think will improve as commodity prices stabilize in six months? Alternatively, will labor costs remain elevated? I would appreciate your insights on profitability moving forward.

Yes, I've broken it down into two parts. Currently, whey protein and milk proteins are at historical highs. The supply and demand for whey protein is quite tight, and while we expect improvement, it may not happen until fiscal '23 or early '24. This presents some opportunities for us, especially as our powder business has seen protein rates that are more than double what they were just a year ago, which should eventually decrease. We also note that the prices for our shakes are gradually rising, and we need to monitor that situation as well. Both of these markets are likely to come down, indicating some temporary fluctuations in our co-manufacturing relationships. Typically, these are long-term contracts, so we are somewhat insulated, although rising labor costs will eventually affect us as they get passed on. Production costs make up about 15% to 20% of our overall expenses, with commodities being key drivers of profitability.

Got it. Thanks so much for the color.

We'll go now to Chris Growe with Stifel. Your line is open.

Thank you. Good morning.

Good morning.

Good morning.

Hi, I just had a quick question for you and sorry if I missed this, but have you said just to get an order of magnitude on the size of the price increases you have in place the new ones for shakes and for powders?

Go ahead, Darcy, go ahead. Sorry.

The second round of pricing is slightly higher than the ones we took before. We didn't specifically just add order of magnitude. The first one was single digits on Premier Protein, double-digits on Dymatize. And this round is slightly higher than that.

Okay. And that's most significant, something in the third quarter kind of going in place during the second quarter. Is that right?

Correct.

Correct.

I was curious about the chart in your slide deck that shows TDPs and their increase. It seems like the product supply was slightly below your expectations, but it did grow. As more supply becomes available, will you continue to see an increase in TDPs? I suppose that will be key to rebuilding in that area?

Yes. I mean, generally. I think there will be. So, you'll see a slight increase as our fill rates and service levels increase. However, we do expect TDPs to be down versus year ago because of that temporary reduction SKUs.

Yes. Okay. And I guess just to be clear on that, then this is I'm thinking like for the second quarter. If you're promoting less, that presumably would negatively affect TDPs. Again, not that it can't grow, but it would certainly have a year-over-year effect on TDPs, is that right?

The promotion won't be related to the TDPs, based on my understanding of your question, but rather will depend on the number of SKUs available on the shelf.

Yes.

We will see. So, I mean that is really what's affecting the TDPs.

Great, thanks. Just have a quick question on the inventory side. Darcy, you're saying, it sounds like basically, maybe all production this year started from existing suppliers, sounds like maybe some of them are getting a little bit better as you kind of get through to consumption still obviously, up decently, volumes are down, say when that's a gap. So, I'm just curious like, kind of in terms of the inventory situation you have with retailers, when we compare that with the reduction SKUs, it's like, you feel like you're in a pretty good place as you look forward through the year. Right, like you've reduced the SKUs. They really recharge or burning for a little bit inventory, but as you right size the SKU relative to your capacities, like there shouldn't be kind of further decline, right, just given that a blower capacity relative to consumption demand, like if that catches jobs you know, what I mean.

So Rob, are you asking about? I mean, I would say our strategy is sound, meaning that we do not expect any change to the number of SKUs that we're going to have and we believe that the fill rate and service levels will continuously increase throughout the year. We will also gradually increase our safety stock throughout the year. Is that what you're asking?

Yes, I just want to make sure that you reduce the SKUs, right. If you've looked in, you forecasted yourself that the amount of capacity you have.

Yes.

Should be able to continue to sell those SKUs that you plan to have on shelf this year.

Yes. That, yes. Absolutely, that's correct. The one thing I will just note is that when you're looking at consumption, we have pretty high, we have some high highs and we've increases when we have promotions. And so, when you're looking at consumption, you'd have to factor in that you're going to see some negatives on premiere, when we're lacking promotions. And that is expected. And so I think that it's just, it's good to have that in the back of your mind when you're looking at the kind of track channel consumption on a week-to-week basis.

Okay, fair enough. To quickly address Jason's question, there’s a lot to consider regarding sequential EBITDA. If we look at Q2 in terms of absolute EBITDA dollars, do you think it might be similar to sales from Q1 to Q2, indicating a corresponding absolute dollar figure for EBITDA? I understand you’re not specifically guiding to that number, but given where the full-year EBITDA guidance stands, it suggests a significant improvement in the second half of the year.

So no, I would not quite characterize it that way. So, we, just to be clear, we expect the EBITDA to decline sequentially from Q1 to Q2. We expect it to be higher than last year because we're lacking a lot of marketing that we do expect it to decline, and that is, again because of higher inflation. And so, that day is the primary piece; but now we expect it to be down. Keep in mind that we've said that, we expect that sales and EBITDA growth will be weighted to the second half of the fiscal year. We do expect it to be switching down.

Right. So, I mean, kind of next year where you came in Q1 and Q2, despite all the moving pieces of volatility. I mean, it seems like the business is still tracking, kind of as you expected coming out of Q4.

Yes, I mean.

The first half is tracking like we expected with the slight shift of Dymatize sales into Q1 from Q2, but yes, the first half is tracking as we expected.

Overall, this year is progressing much like we anticipated, with a slight shift of sales from the second quarter to the first quarter, which is really insignificant and just reflects a minor sales timing adjustment. We did notice inflation rise more than we had forecasted, although we were aware of this trend during our last call. As a result, we adjusted our pricing, which will impact the latter half of the year. Besides the inflation and pricing adjustments, the overall pace of the business aligns closely with our expectations.

Hi, good morning, guys.

Good morning.

Good morning.

Can you provide details on the capacity build over the next 18 to 24 months? Specifically, how much additional capacity is anticipated to come online on a quarterly basis?

Yes, so basically, we have increased capacity every quarter for '23. I mean, and so we see increased and that mostly comes from the existing co-manufacturers are pretty stable. So, the increases come from new co-manufacturers; they start slotting in, in Q2 of this year. There is not a huge benefit this year in '22, so let's still call it 90% of our production is coming from existing for '22. But then, those new co-manufacturers start increasing and become real contributors in '23. Then we also bring on additional co-manufacturers in '23. So, we basically add three new ones in '22. And we add two more in '23. And the big ones, which are new facilities like Michael Foods would come on in later '23. They start up later in the year, and so become kind of smaller contributors in '23, but bigger contributors in '24.

Would you say that 2023 additional capacity is 5%, 10%, 15%. And then when you get to '24. How would you kind of just do that?

Hold on. I'm calculating. In 2022, the new capacity is less than 10%, and it will increase to 20% to 25% in 2023. It will continue to ramp up from there. Keep in mind that some of the new capacity in 2023 comes from new Greenfield facilities, which have a timeline of about 24 months. We are still in discussions with partners for late 2023 and 2024.

Okay. My second question is about the new capacity coming online. You previously mentioned that household penetration for certain brands is around 10%, and it’s 100 basis points above your current position, with 25% more capacity on the way. It seems you don’t view that 10% as your peak. It appears you are expanding capacity due to an anticipated demand that will exceed the 10% household penetration. So why suggest there’s a limit to demand? It feels like you've reached a tipping point, and it's curious to set an arbitrary figure like 10%. Just a thought. I'll leave it at that.

Yes, I completely agree. I don't see it as a limit; I view it as a step along the way. I truly believe this brand, and the category as a whole, has significant upside. I've mentioned this analogy before, but in our category, nutrition bars have gained mainstream acceptance much more quickly than other forms, with nearly 50% household penetration. Our ready-to-drink shakes are at 25%, and powders are even lower. There’s no reason shakes can't approach the penetration levels of nutrition bars. I see immense potential for growth, and I believe Premier Protein is well-positioned to capitalize on this, as it’s a mainstream and approachable brand that effectively meets various consumer needs within the category. Therefore, I do not think 10% represents a limit at all; it's merely a step along the way.

Great, appreciate it.

Thank you.

Hey, everybody. Good morning. First one a very quick one, when you talk about these capacity additions for '23, '24. Is that fiscal or calendar?

Fiscal.

Fiscal, got it. And then one of the things that we didn't talk about as it relates to capacity is if there were any key ingredients or inputs or materials packaging that have created bottlenecks. I know in the past they have, I think you mentioned those little foil wrappers, things like that. Is that all resolved now or is there still some areas of things to watch out for?

Yes, there's nothing that's problematic at the moment. We extended lead times early on to try to prevent those things from happening. Yes, we haven't seen any impacts.

Okay, great. That's all. Thank you.

Thank you.

Good morning, thanks for the question.

Hey, John.

Maybe first off, hi Darcy, congrats on the time. I'd like to ask about powders against the broader evolution of the category maybe you are moving beyond COVID volatility into the new normal, with work from home and such, and how you think about the role for powder within the category. Have you seen a core consumer for powder change at all pre versus post COVID? How do you see powders and RTD coexisting as powders grow from here and then for BellRing, how can you best I guess make powder products complementary to the RTD business?

Yes, it's a great question. So, I'm going to pick up where I was talking about the potential of our RTDs versus nutrition bars; powders have even lower household penetration than RTDs. So, I think that is, and where Premier helped mainstream or has started to help mainstream RTDs, I also believe that powders are at kind of earlier stage of that mainstream trajectory. So, they're different, and all of the different forms have kind of unique occasions. So, if you think of bars as more snacking, RTDs are more meal replacement, although they can be used kind of in between meals, but more meal replacement. Well, powders are mostly used with food, with smoothies, after workouts where they're consumed RTDs and nutrition bars mostly on the go, whereas powders at home. So, they're very complementary. And we have been very successful on Premier Protein with powders; obviously, Dymatize is our number one powder brand. Both of them go after unique and complementary consumers. And then, of course, as I was saying before, they have kind of unique and complementary occasions as well.

Okay, great. And I guess from a supply chain perspective, there's a lot of focus now understandably on the month-to-month and quarter-to-quarter. But aside from just I guess simply increasing volume availability. Are there opportunities underway here with the changes in supplier base now, I guess through F23, F24 that sort of place you in a better position, either format wise or profit wise to come out of this recalibration with new channels for growth, whether it's out of home C stores in consumption, is there opportunity to sort of affect the change in the composition of your capabilities and channels for the longer-term sort of coming out of this year?

I believe 2021 will be seen as a crucial year because it has been the foundation for significant future growth. Currently, we have five production locations, and in about four years, we plan to double that number. We are significantly increasing our bottle capacity, which will enable us to sell products more conveniently in different areas. This expansion will allow us to align our products with various locations and grow our distribution from there. Therefore, I see this year primarily focused on building our capabilities so that we can leverage them for future opportunities.

Okay. Thanks for your time. Appreciate it.

Thank you.

Hi, thanks, Operator. Good morning. I have a question regarding this fiscal year and the level of consumer-facing spending expected, specifically in terms of promotions, advertising, and marketing. How does that compare to a typical year? I'm trying to understand how much additional marketing we might need to implement as we move beyond the supply constraints.

Yes. So, on the marketing side, I think in '21 we spent around 3% of net sales on what we call advertising promotion. This year we are pulling back on that around 2%. Going forward obviously we want to reinvest, we also think that will drive top line growth as well as we've seen from our recent past that our products are very receptive to marketing. And so, we think it would drive, obviously, top line. But, yes, we would expect over the longer term to at least spend back to 3% level and perhaps look to increase that over time as our performance improves.

Is the order of magnitude if I remember this correctly at the time of the separation, right, you had been through a supply chain or supply constraints prior to the separation. And then the next fiscal year, margins stepped back because there was more marketing spend that went in? So, just like order of magnitude will it look like that?

No. So, the situation was a little bit different back then. So, we did see fiscal year, I think it was fiscal '18 that had a stepped up margin. But a part of that was too because protein costs had come down so we benefited from a price increase as well as from favorable protein costs. But, no, I don't think our margin structure should be impacted. Obviously, it sometimes depends on what commodities do and we will have to make sure we are right sizing that. At least historical high prices, it gets harder to get back to the gross margins that we had experienced in the past. But, I do think over the long term, things will even out. And we should see gross margins back where they have been historically coming at 33-34 range, which allows us to spend marketing at a higher level and promotion.

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